How to Build Business Credit for Contractors
Updated: Nov 22, 2021
If you are a contractor, you might find yourself focusing on submitting proposals and landing contracts. Naturally, with all of this extra admin work piling up and the need to go out and do the actual contracting work itself, you might find that your business’s needs, including its marketing strategy, take a back seat.
While this is normal, you should pay mind to your business credit as building business credit can help you, as a contractor, with bonding, securing better contracts, earning funding, getting contractors insurance, getting better terms and conditions, and better managing risk.
Even if you’re just starting, there are manageable ways that new contractors can build business credit.
What is Business Credit for Contractors?
Just like personal credit, businesses also have credit reports. Business credit is a valuable asset that, just like personal credit, can improve the chances of your business receiving funding or financing and can allow you to give your customers more perks.
There are three business credit bureaus where business credit can be reported. These include Dun and Bradstreet (D&B), Experian, and Equifax. And these three firms will keep a record of debt payments, vendor accounts, and additional credit information to protect those financers or customers who might be affected by another business’s poor credit.
Business credit is the same for contractors or businesses, but there different ways that contractors can earn business credit, especially since earning business credit is notoriously challenging for small businesses.
Contractors will also want to look at why they want to get business credit. They might not be seeking financing like many SMBs, but instead are trying to secure a bid. If this is the case, then you’ll want to identify your business credit goals.
Benefits and Goals of Business Credit for Contractors
As a contractor or construction company, you’re usually bidding for construction contracts.
If you specialize in a specific type of construction project, then you’re likely only bidding for certain projects. However, some companies can complete residential projects, commercial projects, and government construction projects.
Each project type requires its own skill sets, and, as you probably know, you’ll be required to submit reviewed engineering plans and specifications, along with costs and estimates. The bid winner is usually determined based on experience, the financial security of the bidder, and reputation.
Naturally, going through this process can be taxing, especially if you don’t get the bid. You might do an extensive amount of research to find the project, complete an estimate, submit a proposal, and follow up. Therefore, having business credit could improve your chances of getting your proposal looked at and approved.
There are six main ways that business credit can benefit your business:
1. Securing a Bond:
Bonding is the first step in being able to submit a construction bid. Before even looking at your company’s proposal, the client might want to assess the financial health of your business by performing a business credit check.
2. Securing Funding:
Business credit is common for businesses of all types who want to secure funding. If your construction company has a strong business credit score or rating, then a lender or banking institution might be more willing to invest in you. Your business could be approved for a line of credit or long-term loan so that you can strategically grow your company, covering expenses and invoices until you are in a better position financially.
3. Insurance Rates:
As a contractor, you will need insurance. Insurance companies likely look at your Dun and Bradstreet scores and ratings to assess your risk.
4. Securing Contracts:
While having good business credit won’t necessarily secure you a bid (especially if you are a new company), it does help. By having positive payment experiences with partners, suppliers, and vendors, you will look more reliable to potential partners or lenders.
5. More favorable terms and conditions:
Terms and conditions are the baselines on which construction contracts operate. If you have better business credit, your terms could be loosened, which means your company is given more trust and leeway around certain tasks.
6. Risk management:
Now, your business might have good credit, but what about your potential partners? You can use business credit ratings as a way of measuring the potential success of working with a new partner.
Having available capital, funds to hire new employees, securing contracts, and the ability to secure a loan, is becoming harder and harder for businesses. Therefore, it is advantageous that you do everything possible to improve the chances of getting capital and securing contracts. Building your business credit can help you do this.
How Construction Companies or Contractors Can Build Business Credit
Now that you recognize the importance of building credit, you can begin to do so. Building credit is simple, but some steps need to be taken. Much like personal credit, you’ll have to learn the risks and debt-related issues that affect credit.
When you’re just starting (either as a business or with business credit), you’ll need to do the following:
Open a Business Credit File
To get started, you’ll want to open a business credit file at the three major credit reporting powerhouses: Experian, Equifax, or Dun and Bradstreet (a DUNS number).
Before you can go through this process, you’ll need to make sure your business is a separate legal entity like a corporation. If you are a contractor and are only a sole proprietor, you might want to consider becoming an LLC.
Be sure to get an Employer Identification Number (EIN) from the IRS as well. Experian, for example, may require that you open a bank account in the legal name of your business and get a dedicated business phone number before you can apply for business credit in your legal business name.
If you have these things, then you might have a business credit file with Experian already. If you don’t, then you may need to rely on working with net 30, net 60, or net 90 vendors who report to the Experian credit bureau so that they can start that process on your behalf.
This same process goes for Equifax. Once your business is legitimately set up and you shop using a vendor who reports to a credit bureau, then you will be able to start growing your credit for Equifax.
DUNS is a little different in that you can apply for a D-U-N-S number. To get a DUNS number, contact Dun and Bradstreet to see if you already have one. If you don’t, you can apply for one for free. It may take up to 30 days to receive this number. Be sure that you are applying in your company’s legal name.
From here on out, creditors and vendors who report to DUNS, Experian, and/or Equifax will help you grow this credit. You can also find and work with vendors who specifically report to the business credit bureaus.
Separate Business and Personal Credit
As you can see, one of the best ways to start building your business credit is to begin building your business’s financial credibility.
This involves opening up business accounts with credible lenders and developing spending patterns that come from doing business. The key is to spend out of a dedicated business account and not just from your personal accounts.
When you start this process, be sure to research your personal credit to see where you stand and then see if you have any business credit already. You then need to go through the process of legitimizing your business.
Perhaps you need to make your company a separate legal entity. If you are a sole proprietor, then you might be able to open up a business bank account and business credit card so that lenders see that you are operating a business.
Maintain Business Credit
Once you have opened up business bank accounts and separated your business credit, you can go about maintaining (and growing) your credit.
One of the best first steps is to open a business credit card. Try to use this card when you can but not to make large purchases. Use it like a revolving credit card that is paid off monthly.
Then, seek out vendors that report to commercial credit bureaus. If you need to use these vendors to operate daily or you use them whenever you need to buy supplies, then you could come to an agreement with them. You might be able to use a net 30, net 60, or net 90 vendors. These types of vendors allow you some leeway in paying the invoice, and it also helps you build your business credit.
Other ways to build your business credit include paying your bills early (not just on time) and making strategic moves that improve your credit score.
Continue To Work Your Business
While you might be eager to build up your business credit fast, and this can be done within 30 days, it’s important to remember that you must keep on doing business. The more business you do, the more that your credit can fluctuate. However, this starts to build a history.
Continue to seek out contracts, pay bills early and/or on time, and take out small credit offers (so long as it doesn’t negatively impact your business credit).
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